Tax Law (Questions About Taxes)/Corporate tax


Dear IJ:

I am a non-CPA controller for a Florida C-corporation.  One shareholder is a foreigner, the other has U.S. Resident status.

Both shareholders seem to think that there is a scenario where, if the corporation sells its U.S. real property, that it can be taxed as ordinary income rather than capital gain.

I have never heard of this option before.

Is this possible?

Thank you in advance.


Dear Jay,

The shareholders probably refer to the rules of tax withholding for the foreign corporations distribution of U.S. real property.

A foreign corporation that distributes a U.S. real property interest must withhold a tax equal to 35% of the gain it recognizes on the distribution to its shareholders. However, this withholding requirement does not apply if the foreign corporation has elected under IRC section 897(i) to be treated as a domestic corporation.

In the case described in your letter, a U.S. property is not distributed to the shareholders but disposed to unrelated parties. Secondly, this is a domestic corporation.

Hence the FIRTPA 35% tax withholding rate is not applicable. Income from sale of real property is taxed as a capital gains.

Hope this helps
I.J.Zemelman, EA

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IJ Zemelman, EA MBA


I am an IRS-authorized EA and principal of a Tax Preparation firm focusing on U.S. Expatriates. We specialize in all tax issues faced by American citizens living abroad - such as foreign earned income, tax treaties, foreign spouse, etc. Visit our website - - for more information.


18 years professional tax experience, 12 with expatriate taxes.

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MBA from Zicklin School Of Business, IRS Enrolled Agent

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